The Greece-ification Of Puerto Rico - Get OUT Of Oppenheimer Funds

Investment Research Dynamics

(Please note:  the term “Greece-ification” was coined by John Titus  of Best Evidence, who will be a guest on the Shadow of Truth podcast show tomorrow).

A big fight is brewing between Oppenheimer Funds and the Governor of Puerto Rico.  The battle is a smaller scale version of the battle between the EU and Greece.  Currently hedge funds own $15 billion in Puerto Rican debt, mutual funds hold $11 billion, and comatose high net worth investors have been stuffed with the rest – $46 billion – by their brain-dead, trusty financial advisors.

Too be sure, there is no doubt many $10’s of billions in credit default swaps connected to the bond insurance on Puerto Rico’s debt underwritten by MBIA, Ambac and Assured Guaranty.  I would not be surprised if Oppenheimer has exposure in this derivative form as well.

Puerto Rico announced on June 28 that it was unable to handle the debt service requirements of $72 billion in debt it has issued over the years.  The debt issued by Puerto Rico is structured as “super” municipal bonds.  This is because it is triple-tax free for everyone in the United States.  Typically muni-bonds are only triple-tax free for residents of the issuing municipality.

Because of this “super” tax-exempt status, the yield hog investors groped for Puerto Rican debt like groping pedophiles running a daycare center.  Despite the junk bond rating status of this debt, investors continue to beg for it like Oliver Twist groveling for gruel.

Puerto Rico’s economy has been sliding for nearly 10 years.   Nearly 50% of the island’s residents are living in poverty.  Yet the buyers of Puerto Rico’s debt continued to have insatiable appetite so Wall Street was more than willing to oblige, naturally.

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt.  including $4.4 billion of uninsured bonds.  Not including tobacco bonds, insured debt and pre-funded bonds, 13.8% of Oppenheimer’s total holding holdings are in Puerto Rico bonds.

This explains why Oppenheimer has assumed the role of Germany in the ongoing battle between creditors and Puerto Rico’s Government.  Puerto Rico’s Governor is seeking to restructure the $72 billion in debt down to a level that will enable Puerto Rico to continue servicing it.  The alternative is to force Puerto Rico to implement draconian budget cuts and tax hikes which would crush the economy and throw even more of its residents in brutal poverty.

Without getting into the details, Puerto Rico can not file bankruptcy in order to force a restructuring of the debt, although Congress is considering legislation which would enable the island to take this route.  If this occurs, 13.8% of Oppenheimer’s asset base will get hammered.  In my experience as junk bond market trader, in this particular asset sector yield hogs almost always lose their shirt.

The message here is clear:  If you own any Oppenheimer mutual funds, you are a complete moron if you do not call up your mutual fund custodian and sell them all tomorrow.  

Source links for this analysis:  Investment News and Vox.com